Gilded youth driving change in emerging markets

The rise of the newly-affluent millennial generation is disrupting traditional industries in emerging markets – and bringing new risks and opportunities for investors.

Despite all the column inches devoted to the so-called millennial generation in recent times, very little attention has been given to one of the more intriguing developments: the contrasting fortunes of millennials in advanced economies and the emerging markets.

While millennials in advanced economies have come under pressure in recent years due to stagnating wages, rising house prices and escalating student debt, an altogether different trend is taking in place in many emerging markets, where millennials are seeing their prospects rapidly improve. This is especially noticeable in India and fast-growing Southeast Asian countries such as Indonesia, which boast large cohorts of young people. This has the potential to be a major investment theme in the coming years.

Taking advantage of the resulting opportunities, however, requires knowledge of the specifics of each country’s demographic make-up and consumer preferences, says Will Ballard, head of emerging-market equities at Aviva Investors in London. He points to the influence of millennial trends in India, where the average age is about 29.

“As in many emerging markets, public transport in India is quite poor, and as the population grows more affluent there has been a rise in the number of private vehicles, especially two-wheelers,” says Ballard. “In urban areas – and in wealthier parts of rural India – there has been a demand for vehicles that stand out from the crowd and manufacturers are keen to capitalise on this trend.”

Ballard cites the example of automaker Eicher Motors, which acquired the British Royal Enfield motorcycle brand as a signifier of quality and style. The company has seen strong demand from young consumers eager to differentiate themselves amid the flocks of identikit mopeds on Indian roads.

The smartphone generation

Coined by the demographers William Strauss and Neil Howe, the term ‘millennial’ usually refers to a young generation born between 1981 and 2000. Like their counterparts in developed markets, emerging-market millennials use smartphones intensively, often favouring local models, or those imported from other EM countries, over Western brands. Chinese-made smartphones from Huawei, Xiaomi and Lenovo are seeing fast-rising sales in the Indian market.

New telecommunications operators have emerged to offer mobile data packages to this demographic, disrupting incumbents that tend to offer patchy service. “We have seen the rise of companies such as Mumbai-based Reliance Jio, which offers data at an incredibly low cost to win millennial customers,” says Ballard.

“Time will tell whether it is successful over the long term – telecoms is a competitive industry – but what’s clear is that telecoms operators that don’t cater to the needs of the younger generation are going to fall behind. We are seeing that across emerging markets.”

As in the West, increased smartphone penetration is enabling the millennial generation to survey peer reviews and compare options. This has implications for education and healthcare as well as consumer products. A relatively wealthy millennial in India will be aware local healthcare provision is poor compared with global standards, so may opt to travel abroad to a high-quality private hospital chain, such as Bumrungrad in Thailand, where medical tourism is a booming industry. “Cross-border services are growing in popularity across emerging markets, which is an interesting trend,” says Ballard.

Chinese millennials

The picture for the younger generation elsewhere in the emerging markets is more mixed. Take China, for example, where millennials face similar economic challenges to their counterparts in the West. As products of the One Child Policy (1979-2015), which skewed demographics, they will need to support a much bigger cohort of older retirees. Property in ‘Tier One’ cities such as Beijing, Shanghai and Guangzhou is becoming just as expensive as in New York and London.

Nevertheless, Chinese millennials are a hugely influential group of consumers: they number 415 million, more than the entire working populations of the US and Western Europe combined. Over the next 10 years their aggregate income could rise by $3 trillion, according to Credit Suisse. And they are feeding the growth of new corporate giants, the so-called BATs (Baidu, Alibaba, Tencent), which offer cutting-edge internet platforms and smartphone apps.

“Alibaba is one of the biggest companies in the world, thanks to growing demand for e-commerce,” says Xiaoyu Liu, fund manager, emerging-market equities at Aviva Investors. “Gaming is driven by the younger generation; that’s benefiting companies like Tencent and NetEase. And Tencent’s WeChat app has 800 million users. The whole population is using it, but millennials are more intensive users compared with their parents.”

WeChat offers a seamless online-to-offline experience, satisfying millennials’ demand for convenience. Users can communicate with friends and family through calls and video-chats, book taxis and overseas holidays, make restaurant reservations, play games, pay bills and purchase items at physical shops – all without ever leaving the app.

Politics and the police state

By collecting data on the huge cohort of Chinese millennials – who are on the whole more relaxed about data protection and privacy than their Western counterparts – these technology companies are developing new innovations in artificial intelligence, as well as fintech platforms such as peer-to-peer lending.

But this wealth of data is also accessible to the government, and is facilitating an Orwellian system of state control. A ‘social credit’ system is in the works: a massive surveillance apparatus designed to keep track of citizens using facial recognition and data about online behaviour collected by technology providers. The government already has thousands-strong teams monitoring and censoring social-media posts.

Chinese millennials are far from the passive victims of government control, however; in fact they are increasingly shaping the political debate in the country, according to Ballard. “Younger generations in China value quality of life, not just ever rising GDP, and the 19th Party Congress showed the government recognises that.

“Beijing residents are unhappy with air pollution, for example. In response, the government has reduced the amount of coal being burned, and there has been consolidation in the steel industry to remove low- quality, high-producing capacity. It shows the rise of millennials can shape government policy, even in what is a one-party state,” Ballard adds.

Impetus for reform

Millennials are having an even more dramatic impact on politics in other countries. A big cohort of young voters pushing for change has contributed to reform efforts in several emerging markets, bringing advantages for foreign investors.

Huge street protests, orchestrated by young people on social media, were a big factor behind the demise of President Dilma Rousseff in Brazil, who was eventually impeached in August 2016 following a corruption scandal. The ousting of Rousseff led to hopes of economic and political reform and the MSCI Brazil Index rose a remarkable 66.2 per cent in 2016, compared with only an 11 per cent rise in the wider MSCI Emerging Markets Index.

Or consider Indonesia, where the median age is under 30. One third of voters in the 2014 presidential election were casting their ballot for the first time, hungry for reform. This cohort of younger citizens helped elect Joko Widodo, a candidate who pledged to challenge corruption, liberalise the Indonesian economy and end trade protectionism (although his programme has had mixed results so far).

The young, growing populations of sub-Saharan Africa could in time deliver similar political and economic benefits, although recent developments in the Middle East suggest vast numbers of working-age citizens may be a mixed blessing for economies that cannot accommodate them with jobs.

“Countries such as Saudi Arabia could face problems if they cannot put the younger generation to work. The Arab Spring was driven by large numbers of young people who were faced with a lack of opportunities,” says Aaron Grehan, senior portfolio manager in Aviva Investors’ emerging market debt team. “But if everything else is aligned, younger demographics can be a massive driver of economic growth and development.”

A new pilot scheme could give investors greater access to China’s vast equity market. But the project may also affect the performance of existing Hong Kong-listed shares, says Will Ballard.

Important Information

Except where stated as otherwise, the source of all information is Aviva Investors Global Services Limited (Aviva Investors) as at 25 January 2018. Unless stated otherwise any view sand opinions are those of Aviva Investors. They should not be viewed as indicating any guarantee of return from an investment managed by Aviva Investors nor as advice of any nature. Information contained herein has been obtained from sources believed to be reliable, but has not been independently verified by Aviva Investors and is not guaranteed to be accurate. Past performance is not a guide to the future. The value of an investment and any income from it may go down as well as up and the investor may not get back the original amount invested. Nothing in this document, including any references to specific securities, assets classes and financial markets is intended to or should be construed as advice or recommendations of any nature. This document is not a recommendation to sell or purchase any investment.

In the UK & Europe this document has been prepared and issued by Aviva Investors Global Services Limited, registered in England No.1151805. Registered Office: St. Helen’s, 1 Undershaft, London, EC3P 3DQ. Authorised and regulated in the UK by the Financial Conduct Authority. Contact us at Aviva Investors Global Services Limited, St. Helen’s, 1 Undershaft, London, EC3P 3DQ. Telephone calls to Aviva Investors may be recorded for training or monitoring purposes. In Singapore, this document is being circulated by way of an arrangement with Aviva Investors Asia Pte. Limited for distribution to institutional investors only. Please note that Aviva Investors Asia Pte. Limited does not provide any independent research or analysis in the substance or preparation of this document. Recipients of this document are to contact Aviva Investors Asia Pte. Limited in respect of any matters arising from, or in connection with, this document. Aviva Investors Asia Pte. Limited, a company incorporated under the laws of Singapore with registration number200813519W, holds a valid Capital Markets Services Licence to carry out fund management activities issued under the Securities and Futures Act (Singapore Statute Cap. 289) and Asian Exempt Financial Adviser for the purposes of the Financial Advisers Act (Singapore Statute Cap.110). Registered Office: 1Raffles Quay, #27-13 South Tower, Singapore 048583.In Australia, this document is being circulated by way of an arrangement with Aviva Investors Pacific Pty Ltd for distribution to wholesale investors only. Please note that Aviva Investors Pacific Pty Ltd does not provide any independent research or analysis in the substance or preparation of this document. Recipients of this document are to contact Aviva Investors Pacific Pty Ltd in respect of any matters arising from, or in connection with, this document. Aviva Investors Pacific Pty Ltd, a company incorporated under the laws of Australia with Australian Business No. 87 153 200 278 and Australian Company No. 153 200 278, holds an Australian Financial Services License (AFSL 411458) issued by the Australian Securities and Investments Commission. Business Address: Level 30, Collins Place, 35 Collins Street, Melbourne, Vic 3000

The name “Aviva Investors” as used in this presentation refers to the global organization of affiliated asset management businesses operating under the Aviva Investors name. Each Aviva investors’ affiliate is a subsidiary of Aviva plc, a publicly- traded multi-national financial services company headquartered in the United Kingdom. Aviva Investors Canada, Inc. (“AIC”) is located in Toronto and is registered with the Ontario Securities Commission (“OSC”) as a Portfolio Manager, an Exempt Market Dealer, and a Commodity Trading Manager. Aviva Investors Americas LLC is a federally registered investment advisor with the U.S. Securities and Exchange Commission. Aviva Investors Americas is also a commodity trading advisor (“CTA”) and commodity pool operator (“CPO”) registered with the Commodity Futures Trading Commission (“CFTC”), and is a member of the National Futures Association (“NFA”). AIA’s Form ADV Part 2A, which provides background information about the firm and its business practices, is available upon written request to: Compliance Department, 225 West Wacker Drive, Suite 2250, Chicago, IL 60606

RA18/0124/01012019

Contributors include

Will Ballard

Head of Emerging Markets and Asia Pacific Equities

Main responsibilities

Will is the lead portfolio manager responsible for our Emerging Markets and Asia Pacific equity strategies.

Experience and qualifications

Prior to joining Aviva Investors, Will worked at Royal Bank of Canada in their Global Arbitrage Trading division. Before this, he was a fund manager at Henderson Global Investors on their Pan European Equity Multi-strategy team.
Will holds an MA (Hons) from Cambridge University, He also holds the UKSIP, Investment Management Certificate and is a CFA® charter holder.

Xiaoyu Liu

Prior to joining Aviva Investors, Xiaoyu worked for JP Morgan Asset Management where she covered all sectors as an analyst focusing on small and mid-sized companies across Asia. She progressed to this position after working there as a sector specialist covering the Technology, Telecoms and Industrial sectors. Before this, she worked for UBS as part of their Global Equity team.
Xiaoyu graduated from the Renmin University, China, before obtaining her Master’s, and subsequently her PhD, in Economics at Birmingham University. She also holds the UKSIP Investment Management Certificate and is a CFA charterholder.

Aaron Grehan

Aaron joined the investment industry and Aviva Investors in March 2000. He was previously a credit fund manager in the liability driven fixed income team managing portfolios for institutional clients.

Experience and qualifications

Aaron joined the credit team in 2004 as a portfolio analyst before becoming an investment analyst in both the LDI FI and Credit teams. Aaron is a CFA® charterholder and holds the investment management certificate.